FTSE directors generally have an excellent understanding of how their businesses are performing. So, I ted to keep an eye on their stock purchases and sales.
Recently, I spotted a substantial director purchase at FTSE 100 oil giant Shell (LSE: SHEL). Here’s a look at the trade and my take on it.
Large Chairman purchase
Regulatory filings show that on 7 February, Shell’s Chairman Sir Andrew Mackenzie snapped up 8,235 shares in the oil company at a price of £24.18 per share. This stock purchase cost the director just under £200k.
This trade is notable for a couple of reasons, in my view.
Firstly, it’s from a top-level insider and industry veteran. Sir Andrew has over three decades of experience in the oil and gas, petrochemicals, and minerals industry. Previously, he was Group CEO of commodities powerhouse BHP from 2013 to 2019. Before BHP, he spent 22 years at BP where he held a number of top-level roles. Given his background, it’s fair to assume that he has a good understanding of Shell’s prospects.
Secondly, it’s a substantial trade. Not only is it large in nominal terms (it’s not often that we see a £200k director purchase here in the UK), but it’s also large in relative terms as it has increased the size of the Chairman’s holding by 30% to 35,858 shares. The size of the trade suggests that he’s relatively confident Shell’s share price is set to climb from here.
An undervalued FTSE stock?
This director purchase reinforces my view that there’s a lot to like about Shell shares right now.
It has momentum at the moment. This is illustrated by the fact that the company just reported adjusted earnings of $39.9bn for 2022 – its highest-ever full-year profit. Its previous adjusted earnings record was $28.4bn for 2008.
It’s also returning a bucketload of cash to shareholders. In its full-year results, the company announced a new $4bn share buyback programme. On top of this, it raised its Q4 dividend by 15%.
However, the shares are still very cheap. Currently, analysts are forecasting earnings per share of $4.93 for 2023. That puts the stock on a forward-looking price-to-earnings (P/E) ratio of around 6.4. To put that multiple in perspective, the median forward-looking P/E across the FTSE 100 is about 14.4 right now.
All things considered, I think the stock has the potential to move higher in the near term.
Will I buy?
Having said that, I don’t plan to buy Shell shares for my own portfolio.
One reason for this is that Shell’s fortunes are linked to the price of oil. And no one knows what will happen to oil prices in the long run.
Another reason is sustainability-related risks. These add uncertainty to the investment case. It’s worth noting that a group of European investors plans to take Shell’s board of directors to court for failing to move away from fossil fuels fast enough.
Given the uncertainty over oil prices and sustainability issues, I think there are better stocks to buy for my portfolio today.
